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Stop Blaming Boomers for Social Security's Mess, and Blame These 6 Things Instead

It's time we stopped pointing the finger at boomers for simply being born. There are far bigger issues with Social Security.

Social Security may have paid benefits to retired workers for more than 78 years, but there's little denying that the nation's most important social program is in trouble.

Each year, the Social Security Board of Trustees releases an annual report that examines the short-term (10-year) and long-term (75-year) outlook for the program. In the latest edition from early June, the Trustees projected that, for the first time since 1982, expenditures would exceed collected revenue. Although we're only talking about a net cash outflow of $1.7 billion, which is hardly noticeable next to $2.89 trillion in asset reserves, it's the sheer significance of this event that's concerning.

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By 2020, this net cash outflow is expected to really begin ramping up. In 2027, an estimated $169 billion more will go out than will be collected, according to the intermediate-cost model. And by 2034, all $2.89 trillion in asset reserves is estimated to be gone. Though this (thankfully) doesn't mean bankruptcy for Social Security, it could lead to an across-the-board cut in benefits of up to 21% to fund payouts through the year 2092 without the need for any further cuts.

The boomers aren't to blame for Social Security's problems

You might be asking, "Who's to blame for this mess?" In many instances, it's the poor baby boomers who get thrust to the top of the blame game, through no fault of their own, might I add.

Boomers, who are defined as being born in the late 1940s, 1950s, and early 1960s, are in the process of hitting the eligible retirement age to claim Social Security benefits and are, thusly, leaving the labor force. Since fertility rates spiked during their generation and they've dropped considerably since, the worker-to-beneficiary ratio is expected to decline from 2.8 to 1 in 2018 to 2.2 to 1 by 2035. Or in plainer English, there aren't enough new workers entering the labor force to account for the ballooning number of retired beneficiaries.

However, we can't blame boomers for simply being born when they were. Instead, let's place the blame for Social Security's mess on the following half-dozen factors.

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1. Increased longevity

One of the biggest issues with Social Security has been increased longevity since the program was crafted in the mid-1930s. When payouts began in January 1940, the average man and woman were living to about 61 years and 65 years, respectively. As of 2016, the average life expectancy in the U.S. had catapulted to 78.6 years.

Meanwhile, Social Security's full retirement age -- the age at which you become eligible for your full retirement benefit as determined by your birth year -- has increased from age 65 to what'll be a cap of age 67 by 2022 since inception. That's right, folks. While the average life expectancy has surged by at least 15 years in four generations, the full retirement age will have climbed by just two years. Put plainly, it means that seniors are able to receive a payout for an extended period of time when the program was only designed to provide a financial foundation for a few years.

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2. Income inequality

Another oft-overlooked issue is that of income inequality. There are two Social Security-specific issues that arise as the rift between the rich and poor widens over time.

First, because the well-to-do have access to preventative medical care and prescription medicines without financial constraints, they tend to live considerably longer than lower-income individuals and families who may not have access to physicians and/or medicine. By living longer, they're able to secure a payout for an extended period of time, thereby straining the program.

The second implication here is that since the wealthy almost certainly have higher lifetime earnings, they'll receive a higher monthly benefit for an extended period of time. Since, among other things, your monthly Social Security benefit is based on your 35 highest-earning years of work, upper-income individuals who are living longer can really rack up substantial lifetime benefits from the program. That's the opposite of what the architects of the program intended in the mid-1930s.

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3. Congressional inaction

Americans really should stop pointing their fingers unfairly at baby boomers and instead point them at their House and Senate representatives. It's been 35 years since Congress last passed a major overhaul of Social Security, and the cracks in the program's foundation are clearly showing.

Congress has known for no fewer than 33 years that the program didn't have adequate capital to continue the current payout schedule for the long term. And yet, they've sat on their hands and done nothing. In fact, the last time lawmakers on Capitol Hill passed a major reform in 1983, they only did so because the program's asset reserves were about to run out and they could no longer kick the can down the road.

The problem is that the longer Congress waits to act, the more painful the solution will likely be on working Americans. As of 2018, the program's 75-year actuarial deficit stood at 2.84%. Or in layman's terms, this means the 12.4% payroll tax on earned income of up to $128,400 (in 2018) needs to be increased by 2.84% today (i.e., 12.4% + 2.84% = 15.24%) to completely offset the expected $13.2 trillion cash shortfall that lies ahead between 2034 and 2092. If Congress continues to wait, this actuarial deficit, and thus the needed payroll-tax hike on workers to right the ship, will shoot well past 3%.

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4. Monetary policy

Though it's not nearly on the same level as congressional inaction, which deserves a serious wag of the finger, the Federal Reserve's monetary policy over the past nine years hasn't been helpful to Social Security.

To cut the Fed some slack, it was trying to prevent the complete collapse of financial and credit systems in the U.S. when it lowered its federal funds target rate to historically low levels of 0% to 0.25% in December 2008. However, by keeping this rate at an historic low for seven years, it weighed down yields on a number of interest-bearing assets, including the special-issue government bonds that Social Security's asset reserves are invested in, as mandated by law.

If we were to look back five or 10 years, we'd see that Social Security's asset reserve investment portfolio was loaded with bonds yielding in excess of 4% and 5%. Today, the average yield is about 2.9%, despite the program sporting a record amount of excess cash. In other words, dovish monetary policy for close to a decade seriously hampered the program's interest income earning potential.

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5. Low fertility rates

According to The New York Times, based on data from the Centers for Disease Control and Prevention in September 2017, lifetime births per woman fell to 1.77, which represents the lowest fertility rate in this country since 1976. Though high unemployment rates following the Great Recession were to blame for a while, the U.S. economy is firing on all cylinders now, and the fertility rate remains very low, historically. The New York Times suggests that millennials are postponing marriage more than previous generations, using contraceptives to avoid an unwanted or unplanned pregnancy, and having their first child later than their parents' generation.

The worry is that, if low fertility rates persist for an extended period of time, it could substantially increase the cost to fix Social Security. We're talking about a notably higher actuarial deficit, as well as expenditures outpacing income by as much as 5.84% annually by 2092, according to the high-cost (i.e., low fertility) model.

Image source: Getty Images.

6. A lull in immigration

Before the misconceptions start flying, let's clear them up. Under traditional Social Security (i.e., not including Supplemental Security Income), undocumented immigrants cannot receive a benefit. However, immigrants who've come here legally and have been granted a path to citizenship, as well as some undocumented immigrants, do pay into the Social Security program via the 12.4% payroll tax on earned income. Those with a legal path to citizenship may have an opportunity one day to earn enough lifetime work credits to receive a retired-worker benefit. Meanwhile, undocumented immigrants can pay into the program, but will never receive a cent back.

Put plainly, Social Security relies on healthy immigration levels, since immigrants tend to be younger and will therefore contribute into the payroll tax for decades to come. However, The New York Times notes that illegal border crossings have been declining for more than a decade. If we're seeing a lull in immigration to the United States, Social Security could be adversely feeling those effects.

Long story short: Stop blaming baby boomers for this mess!

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong